Q1-2007 GDP +1.3% and Other Economic Meanderings

Should anyone be surprised that GDP was up by only +1.3% for the first quarter? It's almost all housing related. Business investment was actually up, and in the long run, that's a more critical component because the productivity from business investment will be used to create higher wages and more jobs.

Consumer spending was up +3.8%. The increase in the inflation indicator used in the GDP calculation was up +3.4% (it had decreased -1% in Q4-2006), but there are indications that this will retreat as housing prices are declining.

Comparisons of core inflation indicators compared to food and energy alone show that inflation is limited to those areas. The Fed will probably stand pat based on this report. Better to have slower growth than it is to have high inflation. One thing this report does, however, is to lower the expectations that the Fed will have to raise rates sometime soon. The economy may have been emerging from its Q1 funk in March, based on the durable goods report released the other day. As always, these reports are subject to revision. This particular report will be revised two times more in May and then June. There has also been a report recently that the Bureau of Labor Statistics has underestimated the size of the workforce yet again. Last year, the "oops" amount by the BLS was one million workers. There are estimates now that the economy has grown such that they are likely to adjust by another half million workers. At issue is the measures of payroll employment versus the reports of employment found in the BLS' household survey.

The latter includes self employment (such as proprietorships, partnerships, and subchapter S corporations) which often do not have employees other than their owners, and they don't count unless that owner is paid on a W-2. The household survey is also where we get the estimates of the number of net new businesses, which is still running at 90,000 per month. Among the reasons for the increase in non-payroll employment are the many employment regulations that make companies fearful of hiring workers for whom they have to pay benefits or be required to pay for work absences, such as family leave. In addition, the rising wealth of the country and increasing average age means that more people seek flexibility in work schedules, such as seniors and families with children where one spouse stays at home, but seeks other income (such as selling real estate, or computer work at home). One cannot underestimate the change in the nature of information as well, where there is now such specialization that many workers can find work at a variety of firms yet not be needed full time. A good example is graphic design, where there are now more freelancers than there are people employed on payrolls in graphic design firms. The rise of small specialty and novelty publishing is also creating many workers there while large publishing businesses are laying off workers. Despite the economic slowdown, and the slowdown in housing, initial claims for unemployment is at 332,000 per week, which is a level that still indicates employment growth.

There are reports of shortages of skilled workers in many parts of the economy. There is an important factor in self-employment that has grander economic effects. Shortages of skilled workers mean that self-employment work can often be steadier and more secure than payroll jobs. While much is made of the minimum wage and wage levels, self-employed people have no wage in many situations. They have to sell their services at market prices, and when the economy slows, self-employed workers tend to reduce their fees. This creates a resiliency and flexibility in the economy that it has not had to the current degree compared to the past. A lot of it relates to baby boomers and where they are in the overall demographic profile of the US. This is the wealthiest, most educated, and healthiest cohort in the history of the U.S. Next week, we get a large number of economic reports, including March printing shipments, both ISM reports, and the employment report.